This judgment concerns the determination of a separate question: whether the defendant has a right to seek to set aside a judgment entered against him, or whether that right has vested in the Official Trustee, since the defendant is an undischarged bankrupt.
In 2017 the plaintiff obtained a money judgment against the defendant in the District Court at Bega. The defendant did not appear at the hearing which led to the entry of judgment against him.
The defendant appealed against the judgment. The Court of Appeal dismissed his appeal with costs: Soloman v Savage [2018] NSWCA 249.
The defendant then brought an application by motion in the District Court seeking to set aside the judgment entered against him. That motion was dismissed with costs.
The defendant sought leave to appeal that decision to the Court of Appeal. The application for leave to appeal was dismissed with costs: Soloman v Savage [2019] NSWCA 294.
The plaintiff served a Bankruptcy Notice upon the defendant. A sequestration order was made under the Bankruptcy Act 1966 (Cth) (the Act). The defendant is still an undischarged bankrupt.
The defendant filed a Notice of Motion on 19 January 2022 seeking the following orders:
1. An order pursuant to r 36.16(2) of the Uniform Civil Procedure Rules (NSW) 2005 (UCPR) setting aside or varying the judgment entered on 27 November 2017.
2. The enforcement of the judgment entered on 27 November 2017 be stayed on an ex parte basis in addition to fresh evidence to be dealt with within the court pending the hearing of this motion.
3. Leave be granted to the defendant to re-open the proceedings to:
1. adduce further evidence; and/or
2. file an Amended Defence and/or Cross Claim; and/or
3. make submissions.
1. Costs.
2. Any further or such order as the Court deems necessary.
At the hearing of the motion a preliminary question arose as to the standing of the defendant to seek the relief set out in the Notice of Motion.
On that issue I received the following material:
1. Affidavit of the defendant dated 11 May 2022 pars 1-12.
2. Letter dated 10 February 2022 from the Australian Financial Security Authority (AFSA) to the defendant.
3. Written submissions for the defendant dated 29 June 2022.
Both parties made oral submissions through their solicitors.
I made an order pursuant to r 28.2 of the UCPR for separate determination as follows:
"Order that the question of whether the defendant has a right to bring the Notice of Motion filed on 19 January 2022, or whether that right is vested in the Official Trustee, be separately determined."
The order for separate determination was made at my suggestion, but both parties consented to the matter being dealt with in that fashion.
[3]
Affidavit of the Defendant dated 11 May 2022
In his affidavit the defendant explained in short terms why he did not attend the Bega District Court on 24 November 2017, when a judgment was given against him in his absence. The defendant says that it was always his intention to defend the proceedings, as he had "substantially paid back the money which is being claimed by the Plaintiff".
The defendant said that on 29 March 2018 he made an application to set aside the default judgment but this application was dismissed. The defendant said that when he made that application he did not have "the new evidence I intend to present for consideration presently".
[4]
Letter from AFSA to Defendant
The letter dated 10 February 2022 from AFSA dealt first with a District Court action and a Supreme Court action in which Mr Soloman was the plaintiff. They are irrelevant for present purposes.
In relation to these proceedings the letter, signed for the Official Trustee in bankruptcy, said as follows:
"As the above proceedings were commenced by you after being declared bankrupt they are not subject to election under s 60(2) of the Bankruptcy Act 1966. This means the Official Trustee does not need to decide whether to take over or discontinue proceedings.
The Official Trustee has sought legal advice to determine whether the proceedings would vest (belong) with the Official Trustee or fall under s 60(4) or s 116(2)(g). If they fell under s 60(4) or s 116(2)(g) this would mean that you would be able to continue pursuing this legal action and the Official Trustee would not get involved nor be entitled to any of the monies that may be awarded to you.
It is the Official Trustee's view that the legal action does not fall under s 60(4) or s 116(2)(g) and accordingly vests (belong) with the Official Trustee. This means that you do not have the legal capacity to continue the legal action.
As there are no funds in the estate and there would be no benefit to creditors to pursue this matter, the Official Trustee will not be joining in the proceedings.
Whilst this is the Official Trustee's view, its [sic] recommended that you seek independent legal advice to determine your legal capacity to continue pursuing this legal action. At this stage the Official Trustee seeks no reason to contact the District Court, however you may wish to seek clarification from the District Court as to your legal capacity to pursue the legal action or what alternate [sic] options you may have."
[5]
Submissions for the Defendant
The written submissions of the solicitor for the defendant commenced by acknowledging the existence of the sequestration order and the bankruptcy of the defendant. Those submissions argue that s 60(2) of the Act did not apply as the motion seeking to set aside the default judgment was not "an action commenced" by the defendant. I accept that submission. The written submissions continued as follows in par 8:
"Here the action is against my client. He did not commence it. It is on the basis of the judgment in this proceeding that he was made a bankrupt. However his bankruptcy is still current and we ask the court's permission that he be allowed to pursue his present application."
During oral submissions this last submission was withdrawn. The solicitor for the defendant acknowledged that the District Court had no power to grant "permission" to bring the Notice of Motion. Rather, the solicitor for the defendant argued that the defendant had a right to bring the Notice of Motion and that such right had not vested in the Official Trustee.
[6]
Bankruptcy Act 1966 (Cth)
Part IV Div 4 of the Act deals with the effect of bankruptcy on property and proceedings.
Section 58(1) of the Act provides as follows:
"Vesting of property upon bankruptcy--general rule
(1) Subject to this Act, where a debtor becomes a bankrupt:
(a) the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b) after-acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
Note 1: This subsection has a limited application if there are orders in force under the proceeds of crime law: see section 58A.
Note 2: Even if property has vested under this section, it may, under the Proceeds of Crime Act 2002 :
(a) become subject to a restraining order; and
(b) be taken into account in making a pecuniary penalty order; and
(c) become subject to a charge to secure the payment of an amount under a pecuniary penalty order, if it is subject to a restraining order; and
(d) be dealt with by the Official Trustee, if it is subject to a restraining order and a court has directed the Official Trustee to pay the Commonwealth an amount under a pecuniary penalty order out of property subject to the restraining order."
Section 5 of the Act contains two relevant definitions. The word "property" means:
"real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property."
Section 58(1)(a) of the Act commences with the phrase "the property of the bankrupt". In s 5 of the Act this phrase is defined to mean:
"(a) Except in subsections 58(3) and (4):
(i) the property divisible among the bankrupt's creditors; and
(ii) any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; and
(b) In subsections 58(3) and (4):
(i) the property, rights and powers referred to in par (a) of this definition; and
(ii) any other property of the bankrupt."
In subpars (a)(i) of the definition of "the property of the bankrupt" the phrase "property divisible among the bankrupt's creditors" appears. Section 116(1) of the Act deals with property divisible among creditors. Section 116(2) of the Act contains exceptions to the general definition in s 116(1). None of the exceptions are relevant to the present issue.
The key question is whether the right which a defendant would normally have to bring a Notice of Motion seeking to set aside a judgment entered in the absence of appearance is a right which has vested in the Official Trustee because it is part of the property of the bankrupt, or whether that right is outside the Act and remains with the defendant himself.
[7]
Consideration of Relevant Authorities
In Cummings v Claremont Petroleum NL [1996] HCA 19; (1996) 185 CLR 124 the High Court considered whether persons who were bankrupt could appeal against the judgments entered against them. Sequestration orders had been made against the estates of two respondents to proceedings in the Federal Court. Judgment was pronounced against both respondents for substantial damages. The Federal Court respondents filed Notices of Appeal to the Full Court of the Federal Court. The applicants in those appeal proceedings applied for the Notices of Appeal to be set aside. The Full Court dismissed the appeals as incompetent. The matter then proceeded on appeal to the High Court.
The High Court held that the bankrupts had no locus standi to institute the appeals.
Brennan CJ, Gaudron J and McHugh J said (at 138):
"Of course, a money judgment entered against a bankrupt has the effect of increasing the amount of the debts provable in his estate. But it is immaterial that, if an appeal against the judgment were successful, there would or might be a surplus in the estate after the remaining creditors are paid. A bankrupt's contingent interest in a surplus does not give him an interest which will allow him to sue to enforce proprietary rights and, that being so, it cannot give him an interest to appeal to minimise liabilities."
The judgment in the High Court referred to and followed a decision of the English Court of Appeal in Heath v Tang [1993] 1 WLR 1421; [1993] 4 All ER 694. In Heath v Tang the issue before the English Court of Appeal was whether a bankrupt was entitled to pursue an appeal from the judgment on which the bankruptcy order was founded or whether it had to be brought in the name of his trustee. The Court of Appeal refused the bankrupt leave to appeal on the ground that he had been divested of any interest in the proceedings and had no locus standi to appeal from a judgment against him which was enforceable only against the estate vested in his trustee.
Delivering the judgment of the English Court of Appeal, Hoffmann LJ said:
"But in cases in which the plaintiff is claiming an interest in some property of the bankrupt, that property will have vested in the trustee. And in claims for debt or damages, the only assets out of which the claim can be satisfied will have likewise vested. It will therefore be equally true to say that the bankrupt has no interest in the proceedings."
In the High Court Dawson J and Toohey J said (at 146):
"In one sense the bankrupt may have a very real interest in the proceedings. If the claim is defended successfully or any judgment obtained is set aside on appeal, the result may be in a particular case that the creditors will be paid in full and that there will be a surplus payable to the bankrupt. Nevertheless, in our view, the result arrived at by the Court of Appeal was correct."
Dawson J and Toohey J also cited Hoffmann LJ when his Lordship said:
"Nevertheless, the principle that the bankrupt is divested of an interest in his property and liability for his debts remains fundamental in the new code. The consequences for the bankrupt's right to litigate do not seem to us inconvenient or productive of injustice. The bankruptcy court acts as a screen which both prevents the bankrupt's substance from being wasted in hopeless appeals and protects creditors from vexatious challenges to their claims."
Dawson J and Toohey J agreed with Hoffmann LJ who said:
"In principle a bankrupt cannot in his own name appeal from a judgment against him which is enforceable only against the estate vested in his trustee."
In my view the principle in Cummings applies in the present case. The aim of an appeal is to set aside the judgment given at first instance. That is also the aim of the present motion. It seeks to set aside the original judgment given in 2017.
Cummings was applied in the Supreme Court of New South Wales by Justice Santow in Hedwan v Hannouf (1997) 140 FLR 229. The judgment of Justice Santow seems directly in point. A defendant sought to set aside the judgment debt which grounded his bankruptcy, where the bankruptcy having been obtained in circumstances where his legal representatives failed to attend the relevant hearings. The judgment creditor contended that the bankrupt had no standing to seek to set aside the judgment debt.
After referring to the High Court in Cummings, Justice Santow said that if a bankrupt were allowed to seek to set aside a judgment then:
"…it can readily be seen that such a result could not be compatible with the paramount effect of Commonwealth bankruptcy legislation. One might test it by asking whether the court would have power to make such an order in circumstances where the Official Trustee might take a different view as to whether to pursue a particular action. Indeed the High Court in Cummings expressly dealt with that matter (at 148) by pointing to the proper procedure open to a bankrupt under s 178 of the Bankruptcy Act."
Justice Santow dismissed the application to set aside the judgment, finding that the defendant had no standing to seek to set aside the judgment debt which grounded the bankruptcy. The right to make such an application had vested in the Official Trustee.
While the decision of a single judge of the Supreme Court is not binding on this court, I respectfully agree with the reasoning of Justice Santow in Hedwan. A right to seek to set aside a judgment is a species of property which has vested in the Official Trustee. The defendant has no standing to bring the present motion.
To the same effect was the decision of Justice Pain in Baulkham Hills Shire Council v Stankovic (No. 6) [2010] NSWLEC 33. The respondent in proceedings in the Land and Environment Court filed a Notice of Motion seeking various orders including a stay of the orders previously made by that Court. The trustee in bankruptcy appeared and submitted that Mr Stankovic had no standing to pursue the Notice of Motion. It was argued that the right to seek to set aside the judgment was property which was vested in the trustee and the proper course was that any such motion should proceed through initiation by the trustee in bankruptcy.
Justice Pain referred to the High Court in Cummings and Justice Santow in Hedwan. His Honour found that, on the authority of Cummings, a bankrupt has no standing to institute an appeal from a judgment, and on the authority of Hedwan, a bankrupt has no standing to set aside a judgment. The ultimate finding was that Mr Stankovic had no standing to pursue his Notice of Motion, which was then dismissed.
I am bound by the decision of the High Court in Cummings, and persuaded by the reasoning in Hedwan and Stankovic, to come to the same conclusion. Because my answer to the separate question means that Mr Soloman cannot bring this motion in the first place, such determination renders it unnecessary to hear the motion, which will be dismissed: r 28.4 UCPR.
[8]
Orders
The orders are:
1. Determine the separate question as follows: the defendant has no right to seek to set aside the judgment entered against him, as that right has vested in the Official Trustee.
2. Dismiss the defendant's Notice of Motion filed on 19 January 2022.
3. Order the defendant to pay the plaintiff's costs.
[9]
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Decision last updated: 05 July 2022